Munis ‘Cheap But May Get Cheaper,’ Wait Until July To Buy – LPL

By Michael Aneiro

After all the bond selling that you might have noticed going on lately, it seems like a good time to check in with the beleaguered muni market and see if, at long last, it might be a good time to buy munis again. For starters, here’s Anthony Valeri, fixed-income strategist at LPL Financial, who says today that municipal bonds are “cheap but may get cheaper”:

Municipal-to-Treasury yield ratios are now at their highest levels of the past year. Average AAA-rated 10- and 30-year municipal-to-Treasury yield ratios are 119% and 117% respectively. Despite cheap valuations, secondary market supply remains notable, with over $1 billion of municipal bonds out for sale for the seventh consecutive day, the longest such stretch since the Meredith Whitney induced sell-off of late 2010/early 2011. If that was not enough, roughly $10 billion of new issuance is likely to further weigh on the market this week.

Municipal seasonal strength in question. We had expected the municipal market to benefit from seasonal strength at the start of July, but that will likely be pushed back until mid-July at the earliest given the supply backlog and highly illiquid markets. Shell-shocked investors may refrain from buying given recent weakness, posing a threat to reinvestment demand. While some compelling opportunities are emerging in the municipal market, illiquid markets and the approaching quarter-end suggest investors may be better served waiting until after the July 4th holiday.

The muni market got a little bit less cheap today, as gauged by the iShares S&P National AMT-Free Muni Bond (MUB) fund, which is up 1.5% to $102.90 Tuesday afternoon, but that’s still down about 9% since early May. Earlier today my colleague Brendan Conway wrote about how MUB has been trading at the steepest discount ever to the value of its underlying assets, a trend seen lately in muni closed-end funds too.